As mentioned in the first and second parts of this story, on March 24, 2020, in a widely reported and closely followed decision, Judge Peter Castel imposed a sweeping preliminary injunction preventing Telegram from issuing its planned crypto asset, Grams. Shortly thereafter, the judge clarified his initial ruling by explicitly holding that the injunction applied to all sales worldwide regardless of where the original purchasers might be located. Efforts by Telegram to see that the Grams would not easily be resold into the United States were unavailing. This part of the story looks at the decision to apply U.S. requirements extraterritorially (outside our geographic borders, to a company headquartered elsewhere, selling to persons located elsewhere).
There is a clear presumption against applying U.S. law to foreign transactions. On the other hand, if the transaction has a sufficient connection to U.S. citizens or markets, U.S. law may be applied. The difficulty is in knowing how much of a connection is required.
In 2010, the U.S. Supreme Court held in Morrison v. National Australia Bank Ltd. that in order to apply the anti-fraud provisions of the U.S. securities laws, the securities in question either had to be listed on a domestic exchange or the transaction had to be domestic in character. Shortly after that decision was released, U.S. Congress enacted Dodd–Frank, which gave federal district courts jurisdiction over fraud claims involving significant steps in furtherance of a violation or having a foreseeable substantial effect in the United States.
The meaning of Dodd–Frank is subject to debate, with some commentators saying the language does not change the law and merely grants jurisdiction over claims. Others say the decision was designed to expand the reach of U.S. law. Given this uncertainty, in particular, it is not unreasonable for Judge Castel to have decided that if Telegram had issued the Grams, they would eventually have found their way into the hands of at least some U.S. purchasers. This could be seen as a substantial effect here. However, the fact that the judge’s ruling is defensible under U.S. law does not mean that the decision is supportable from a policy perspective.
By their very nature, crypto assets are inherently transnational. They cannot be confined to a single nation, and it is impossible to ascertain where they are definitively “located,” since in reality, a crypto asset is nothing more than computer-generated alpha-numeric sequences stored electronically on the World Wide Web. This means that when the U.S. insists on applying its law to crypto assets because they might be resold into the U.S., there is almost inevitably the risk of over-regulation.
In most cases, the issuer is likely to be complying with the law of the nation(s) where the primary effects are felt. Adding U.S. law on top of those is likely to create overlapping, redundant and potentially inconsistent requirements.
In addition, the possibility that U.S. law will be applied to transactions that are essentially occurring elsewhere creates uncertainty, making it more likely that entrepreneurs will work very hard to stay out of U.S. markets. Not only does this diminish the availability of capital for legitimate businesses but it also prevents U.S. investors from having the option of participating in those endeavors.
Not surprisingly, this reality is likely to increase international resentment. Just as the U.S. has its own objectives and interests to protect, so too do other nations. Their approach to regulation of securities transactions and markets reflects their own unique priorities and needs, while blanket application of U.S. law ignores their legitimate policy considerations. Foreign governments have repeatedly disapproved of U.S. efforts to enforce anti-fraud mandates in their markets; they are no more likely to welcome our regulations in their crypto markets.
In the past, international reaction has suggested that the extraterritorial application of U.S. law is intrusive and arrogant. This, in turn, increases the impetus for pushback where other nations seek to impose their laws and vision on U.S. businesses.
The reality is that a system of international regulation where individual nations vie to have their particular viewpoint applied globally is antithetical to the goal of harmonization. Extraterritorial application of U.S. domestic law diminishes the role of traditional international law, resulting not only in confusion, over-regulation and legal uncertainty but also reducing the possibility of developing an international consensus where a harmonized, cooperative approach to regulation of crypto is created.
SEC v. Telegram is a single decision, from a single judge, in a single court, on a motion for a preliminary injunction. There are many opportunities for the decision’s impact to be limited. It can be factually distinguished because Telegram did not raise many of its arguments until after the preliminary injunction issued. Other courts can disagree with the rationale or result. The SEC could change its approach in future enforcement proceedings. Congress could step in to mandate a different approach.
This comment suggests that any of those alternatives are likely to be preferable to insisting U.S. law must apply to all crypto transactions no matter where they are based on the grounds that the crypto assets are likely to land in the hands of U.S. purchasers eventually.
This is Part 3 of a three-part series on the legal case between the U.S. SEC and Telegram’s claims to be securities. Read Part 1 on introduction to the context here, and Part 2 on why this decision should not be followed in other cases here.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Carol Goforth is a university professor and the Clayton N. Little Professor of Law at the University of Arkansas (Fayetteville) School of Law.
The opinions expressed are the author’s alone and do not necessarily reflect the views of the University or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
SEC v. Telegram: Part 3 — The extraterritorial reach of US securities laws